Japan intervention would slow, not stop, yen rise
Saturday, 13 December 2008
The dollar's tumble to a 13-year low below 90 yen on Friday after the U.S. automaker rescue plan died in Congress stirred speculation that Japanese authorities will intervene to stem the yen's surge.
Analysts believe that while Japan has shied away from intervening in currency markets for nearly five years, the hit to its big manufacturers -- the economy's mainstay -- from a stronger yen has made them more willing to act.
Japan's top financial diplomat, Naoyuki Shinohara, told Reuters that the Ministry of Finance would act appropriately depending on the market situation -- a clear warning that authorities are prepared to sell the yen.
But media quoted Finance Minister Shoichi Nakagawa as saying that the ministry was not considering intervening in the currency market now.
The MOF makes decisions on interventions that are then conducted by the Bank of Japan.
For Japan, intervention would likely be considered successful even if it simply slowed the yen's rise rather than stopped it altogether.
Japan has a long history of trying to stem yen strength by intervening to buy dollars, but it has stayed out of the market since a 35 trillion yen ($382 billion) campaign over 15 months ended in March 2004.
The MOF has gradually moved away from heavy intervention because that last campaign had mixed results, with the yen steadily rising the whole time to near 103.40 to the dollar in the last month.
The explosion of currency trading also means Japan may have a harder time trying to have much impact on the currency market.
Daily turnover in the dollar/yen exchange rate averaged $397 billion in 2007, a nearly 40 percent increase in six years, according to the last survey of the foreign exchange market by the Bank for International Settlements.
Japan does risk having market players try to test its will and ability to prevent further yen strength if it does intervene.
Japan may even face a situation of fighting against its own investors if yen strength starts to happen due to Japanese investors repatriating some of their massive investments abroad.
So far Japanese investors have defied expectations and kept shifting money into foreign assets during the turmoil of the past few months.
And if Japan intervenes, it is likely to go it alone.
While Group of Seven economic powers issued a rare statement singling out the volatile yen in October, the move came at the request of Japan, and French Economics Minister Christine Lagarde later said any intervention would be conducted by Japan alone.
Japanese intervention on the yen will likely attempt to have a psychological impact on the market even while battling what has been a very painful hit to the country's huge exporters.
Sony's decision this week to lay off 16,000 workers and cut $1.1 billion of costs serves as a reflection of how Japan's big companies are suffering from the global economy's slide into recession.
The Reuters Tankan, which serves as a leading indicator of the BOJ's quarterly survey of sentiment at big manufacturers, plunged at a record pace in November.
The BOJ's tankan will be released on Monday, and in the previous edition in September big manufacturers had assumed a dollar/yen exchange rate 102.48 -- a full 14 percent above current levels near 89.70.
The dollar hit a low of 88.10 yen on Friday, the lowest since 1995 and raising the prospect of a drop near the all-time low of 79.75 touched that year.
Japanese officials are also likely worried that a further dollar plunge against the yen would trigger more exotic derivatives that have added fuel to the yen's surge and the sell-off in the Nikkei and other markets this year.
The derivatives, including some such as power-reverse dual-currency notes, were a popular form of the carry trade among Japanese individual investors and involved options in dollar/yen and other yen crosses.
The options are placed at levels like 90 and 80 in dollar/yen and used as a way to boost the relatively high yields the derivatives offer.
But when the options are triggered, the hedging flows for banks that had sold the structures force them to sell the dollar into a falling market.
Such forced selling tied to exotic derivatives played a role in the yen's 10.3 percent surge on the BOJ's trade-weighted index in October -- the biggest since the yen was allowed to trade freely in 1973.
That monthly spike also eclipsed previous milestones in the yen's history, such as its surge when carry trades were unwound en masse in 1998 and in 1985 when G5 powers agreed on the Plaza Accord to depreciate the dollar against the yen. — Reuters
Analysts believe that while Japan has shied away from intervening in currency markets for nearly five years, the hit to its big manufacturers -- the economy's mainstay -- from a stronger yen has made them more willing to act.
Japan's top financial diplomat, Naoyuki Shinohara, told Reuters that the Ministry of Finance would act appropriately depending on the market situation -- a clear warning that authorities are prepared to sell the yen.
But media quoted Finance Minister Shoichi Nakagawa as saying that the ministry was not considering intervening in the currency market now.
The MOF makes decisions on interventions that are then conducted by the Bank of Japan.
For Japan, intervention would likely be considered successful even if it simply slowed the yen's rise rather than stopped it altogether.
Japan has a long history of trying to stem yen strength by intervening to buy dollars, but it has stayed out of the market since a 35 trillion yen ($382 billion) campaign over 15 months ended in March 2004.
The MOF has gradually moved away from heavy intervention because that last campaign had mixed results, with the yen steadily rising the whole time to near 103.40 to the dollar in the last month.
The explosion of currency trading also means Japan may have a harder time trying to have much impact on the currency market.
Daily turnover in the dollar/yen exchange rate averaged $397 billion in 2007, a nearly 40 percent increase in six years, according to the last survey of the foreign exchange market by the Bank for International Settlements.
Japan does risk having market players try to test its will and ability to prevent further yen strength if it does intervene.
Japan may even face a situation of fighting against its own investors if yen strength starts to happen due to Japanese investors repatriating some of their massive investments abroad.
So far Japanese investors have defied expectations and kept shifting money into foreign assets during the turmoil of the past few months.
And if Japan intervenes, it is likely to go it alone.
While Group of Seven economic powers issued a rare statement singling out the volatile yen in October, the move came at the request of Japan, and French Economics Minister Christine Lagarde later said any intervention would be conducted by Japan alone.
Japanese intervention on the yen will likely attempt to have a psychological impact on the market even while battling what has been a very painful hit to the country's huge exporters.
Sony's decision this week to lay off 16,000 workers and cut $1.1 billion of costs serves as a reflection of how Japan's big companies are suffering from the global economy's slide into recession.
The Reuters Tankan, which serves as a leading indicator of the BOJ's quarterly survey of sentiment at big manufacturers, plunged at a record pace in November.
The BOJ's tankan will be released on Monday, and in the previous edition in September big manufacturers had assumed a dollar/yen exchange rate 102.48 -- a full 14 percent above current levels near 89.70.
The dollar hit a low of 88.10 yen on Friday, the lowest since 1995 and raising the prospect of a drop near the all-time low of 79.75 touched that year.
Japanese officials are also likely worried that a further dollar plunge against the yen would trigger more exotic derivatives that have added fuel to the yen's surge and the sell-off in the Nikkei and other markets this year.
The derivatives, including some such as power-reverse dual-currency notes, were a popular form of the carry trade among Japanese individual investors and involved options in dollar/yen and other yen crosses.
The options are placed at levels like 90 and 80 in dollar/yen and used as a way to boost the relatively high yields the derivatives offer.
But when the options are triggered, the hedging flows for banks that had sold the structures force them to sell the dollar into a falling market.
Such forced selling tied to exotic derivatives played a role in the yen's 10.3 percent surge on the BOJ's trade-weighted index in October -- the biggest since the yen was allowed to trade freely in 1973.
That monthly spike also eclipsed previous milestones in the yen's history, such as its surge when carry trades were unwound en masse in 1998 and in 1985 when G5 powers agreed on the Plaza Accord to depreciate the dollar against the yen. — Reuters